Lamm ex rel. Ira v. State St. Bank & Trust

• Decision Date: 14 April 2014
• Docket Number: No. 12–15061.,12–15061.
• Citation: 749 F.3d 938
• Parties: Douglas LAMM, Individually and on behalf of Douglas Lamm IRA, Plaintiff–Appellant, v. STATE STREET BANK AND TRUST, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

749 F.3d 938

Douglas LAMM, Individually and on behalf of Douglas Lamm IRA, Plaintiff–Appellant,

v.STATE STREET BANK AND TRUST, Defendant–Appellee.

No. 12–15061.

United States Court of Appeals, Eleventh Circuit.

April 14, 2014.

Curtis David Carlson, Carlson & Lewittes, Miami, FL, for Plaintiff–Appellant.

Andrea J. Robinson, Miranda Hooker, Eric D. Wolkoff, Boston, MA, Patrick Glenn Dempsey, Stanley Howard Wakshlag, Miami, FL, for Defendant–Appellee.

Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 9:12–cv–80317–KLR.

Before MARTIN and JORDAN, Circuit Judges, and BAYLSON,^* District Judge.

JORDAN, Circuit Judge:

This appeal mainly concerns what duties a custodian bank has under New York and Florida law to protect a customer from fraudulent transactions carried out by the customer's investment advisor. We hold that, under the facts alleged here, the custodian bank breached no duty, contractual or otherwise, by accepting on behalf of its customer securities that later turned out to be fraudulent and listing those securities on monthly account statements issued to the customer. We therefore affirm the district court's dismissal of the customer's complaint.

I

We briefly restate the facts alleged in the complaint and recited in the district court's order.

In 2001, Douglas Lamm engaged James Tagliaferri and his investment firm, Taurus Advisory Group, LLC, as investment advisors. Pursuant to S.E.C. Rule 206(4)–2, which requires segregation between an investment advisor's funds and those of his clients, see17 C.F.R. § 275.206(4)–2, Mr. Lamm created two separate custodian accounts, an individual account with Chase Bank and an IRA account with Investment Bank & Trust Company. Mr. Lamm granted Taurus broad authority to invest his assets in both accounts. In 2007, State Street took over the accounts and assumed the obligations under the corresponding custody agreements.¹

Around the same time, Mr. Tagliaferri moved his investment advisor company to the Virgin Islands and, from November of 2007 to November of 2009, invested Mr. Lamm's funds in “risky and highly speculative stocks of micro-cap companies, ... purported notes from these micro-cap companies, and personal loans and mortgages.” Compl. at ¶ 25. In settling these transactions, State Street accepted on behalf of Mr. Lamm pieces of paper purporting to be promissory notes and listed those notes on monthly account statements issued to Mr. Lamm. In April of 2011, State Street sent a letter to Mr. Lamm warning him that it could not obtain updated valuations for certain “illiquid, thinly traded, and/or private placement securities” and were thus listing those securities as having no market value. Ultimately, the purported promissory notes turned out to be worthless and resulted in just over $1 million in lost principal to Mr. Lamm.

Mr. Lamm sued State Street, alleging in essence that it had a duty to notify him that the securities in his account were worthless. He asserted claims for breach of express contract, breach of implied contract, breach of fiduciary duty, negligence, gross negligence, aiding and abetting the breach of a fiduciary duty, and aiding and abetting fraud. All claims were based on the following alleged conduct by State Street: (a) allowing Mr. Lamm's funds to be disbursed as payment for fake notes; (b) failing to notify Mr. Lamm that certain of the purported securities were not signed by the purported obligor, but rather by Taurus; (c) failing to notify Mr. Lamm that certain of the purported securities were not payable to him but rather to “Hunter & Co.,” a company with the same address as Taurus; (d) allowing cash to be diverted from Mr. Lamm's accounts without timely delivery of a security in exchange; (e) allowing cash to be diverted from Mr. Lamm's accounts without delivery of any security; (f) listing fake CUSIP numbers ² on the monthly statements provided to Mr. Lamm; (g) issuing monthly statements to Mr. Lamm that included inaccurate, inflated or false market values; (h) charging excessive custodian fees based on false market values; (i) failing to perform the audits, reporting and custodian duties required of IRA custodians; ³ and (j) otherwise failing to report and disclose the obvious fraud of Taurus to securities regulators and Mr. Lamm.

The district court granted State Street's motion to dismiss Mr. Lamm's contract claims on the ground that State Street had a “merely administrative” role in managing Mr. Lamm's accounts and thus owed him no duty to guard against his investment advisor's misconduct. See Lamm v. State Street Bank & Trust Co., 889 F.Supp.2d 1321, 1327–31 (S.D.Fla.2012). The district court also ruled that Mr. Lamm's negligence claims were barred by Florida's economic loss rule, see id. at 1332, a doctrine which the Florida Supreme Court subsequently limited to products liability cases in Tiara Condo. Ass'n, Inc. v. Marsh & McLennan Companies, Inc., 110 So.3d 399, 407 (Fla.2013). Finally, the district court concluded that Mr. Lamm had not sufficiently alleged knowledge on the part of State Street, and as a result his aiding and abetting claims had to be dismissed. See Lamm, 889 F.Supp.2d at 1332–33.

II

We review de novo the district court's grant of State Street's motion to dismiss under Rule 12(b)(6), accepting the factual allegations in the complaint as true and construing them in the light most favorable to Mr. Lamm. See Mills v. Foremost Ins. Co., 511 F.3d 1300, 1303 (11th Cir.2008). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citations omitted).

III

New York law governs Mr. Lamm's contract claim under the choice of law provision in the custody agreement. See American Family Life Assur. Co. of Columbus, Ga. v. U.S. Fire Co., 885 F.2d 826, 830 (11th Cir.1989) (forum state's choice of law rules determine which state's substantive law applies); Maxcess, Inc. v. Lucent Techs., Inc., 433 F.3d 1337, 1341 (11th Cir.2005) (contractual choice of law provisions are enforceable in Florida absent contravening public policy). Under New York law, “[w]hen interpreting a contract, a court determines the intent of the parties from within the four corners of the contract, giving full effect to the plain meaning of the language used and the parties' reasonable expectations.” Jackson Heights Care Ctr., LLC v. Bloch, 39 A.D.3d 477, 479, 833 N.Y.S.2d 581 (N.Y.App.Div.2007). Where a contract is clear and unambiguous, interpretation is a matter of law. See Hartford Acc. & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S.2d 895, 305 N.E.2d 907, 909 (1973).

The relevant portions of the custody agreement defining State Street's rights and duties are scattered throughout the document, and we recite them in our analysis as applicable. The basic arrangement was that State Street would hold Mr. Lamm's assets and carry out enumerated transactions as directed “by or on behalf of” Mr. Lamm (sell or purchase securities, transfer funds, etc.). State Street could carry out certain administrative transactions without Mr. Lamm's prior authorization, such as collect interest or dividends, present obligations for payment, and convert currency. Taurus was listed in the agreement as an authorized agent of Mr. Lamm, and State Street was permitted to rely on Taurus' instructions to buy or sell securities or transfer funds to third parties. State Street was to send Mr. Lamm monthly account statements listing the assets in his account. To the extent State Street listed market values on the statements, they had to be from sources State Street “believed to be reliable,” even though State Street could not guarantee their accuracy. State Street further assumed no responsibility for supervising investments or making investment recommendations; assumed no liability for losses arising out of account transactions except as caused by State Street's negligence or willful misconduct; and limited its duties to those set forth in the agreement.

The custody agreement thus contemplated that State Street would have no decisionmaking role in Mr. Lamm's investments but would hold Mr. Lamm's assets, carry out his and Taurus' investment instructions, and render accounts, very much like a broker handling a nondiscretionary account. As noted in Sekerak v. Nat'l City Bank, 342 F.Supp.2d 701, 711 (N.D.Ohio 2004), a custodian bank with no investment discretion is “much like a broker executing orders given by the account holder. Its only duty [is] to execute the written orders it receive[s] from [the account holder's] designated agent.” Courts have therefore consistently held that the duties of brokers handling nondiscretionary accounts are essentially limited to executing orders. See J.C. Bradford Futures, Inc. v. Dahlonega Mint, Inc., 1990 WL 95625, at *5 (6th Cir. July 11, 1990); Martinez Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404, 412 (5th Cir.1998); Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817, 824 (10th Cir.1986). With this basic framework in mind, we consider each of Mr. Lamm's allegations and conclude that none is sufficient to state a claim for breach of contract.

First, Mr. Lamm alleged that State Street disbursed his funds to pay for fake notes. Under Paragraph 14 of the custody agreement, State Street was specifically authorized “to purchase or receive securities and make payment therefor” in accordance with Taurus' instructions. Paragraph 5 authorized State Street to honor funds transfers in accordance with Taurus' instructions “without inquiry into the circumstances,” and Paragraph 20(A) absolved State Street of the responsibility to “supervise the investment of ... any...